Cooper Industries Proposal to Acquire Nicholson File Company

Cooper Industries Proposal to Acquire Nicholson File Company

• 1.
  Cooper Industries Proposalto Acquire Nicholson File Company MAY 3, 1971
• 2.
  Previous Acquisitions  1967 LufkinRule Company  1969 Crescent Niagara Corporation  1970 Weller Electric Corporation
• 3.
  Criteria for Acquisition 1.Industry must be one where Cooper Industries can be a major leader 2. Industry must be stable, with a broad appetite for “small ticket” items 3. Only acquire leading companies in their respective markets
• 4.
  Nicholson File CompanyStrengths  One of the largest domestic manufacturers of hand tools  50% market share of $50 million market for files and rasps  9% market share of $200 million market for hand saws and saw blades  Only Sears, Roebuck, and Company and Disston hold larger shares  48 salespeople and 28 file and saw engineers  Marketed to 2,100 hardware wholesalers  Products in 53,000 stores  Sold in 137 countries
• 5.
  Why Merge?  Opportunityto leverage complementary product offerings between Cooper and Nicholson  Increased long-term growth potential by increasing exposure of respective product lines to new markets and customers  Annual synergies from the reduction of COGS and SG&A
• 6.
  Financial Implications ofMerger Cooper Industries & Nicholson File Company
• 7.
  Nicholson Est. IncomeStatement 1972 1973 1974 1975 1976 Net Sales 58.62 Growth @ 6% 74.00 COGS 38.10 65% of Sales 48.10 SG&A 11.14 19% of Sales 14.06 Dep. Exp 2.10 Constant 2.10 Int. Exp 0.80 Constant 0.80 Other Exp. 0.20 Constant 0.20 EBT 6.28 6.84 7.44 8.07 8.74 Taxes 2.51 40% of EBT 3.50 NI 3.77 4.10 4.46 4.84 5.24 Exhibit 1
• 8.
  Analysis of NicholsonCash Flows 1972 1973 1974 1975 1976 NI 3.77 4.10 4.46 4.84 5.24 Dep 2.10 2.10 2.10 2.10 2.10 Capex 2.10 2.10 2.10 2.10 2.10 +/- NWC 1.56 1.64 1.63 1.73 1.83 Net CF 2.21 2.46 2.83 3.11 3.41 Value 49.04 Total FCF 2.21 2.46 2.83 3.11 52.45 Exhibit 1
• 9.
  Value of Operations 19711972 1973 1974 1975 Total FCF 2.21 2.46 2.83 3.11 52.45 NPV of Equity (in millions): $34.89 Required return = 13.95% Growth = 7% Nicholson Shares Outstanding: 584,000 Value Per Share: $59.74 Exhibit 1
• 10.
  Is $59.74/share anaccurate value?  The value represents conservative sales and earning growth.  Conducted sensitivity analysis (Exhibit 3)  Low valuation: $45.11  High valuation: $92.12  Median valuation: $58.39  Mean valuation: $61.77
• 11.
  Consideration for Offer All stock offering  Preserves cash on balance sheet  2.25 shares of Cooper for every share of Nicholson (Exhibit 4)  Offer price = $54.00/share  New EPS = $2.70
• 12.
  Summary Nicholson Shareholders  Offerpremium is 22.73% over last close  Offer is 1.69% over VLN offer  Cooper shares provide greater liquidity than VLN shares  Nicholson will become a fully integrated part of Cooper Cooper Shareholders  Offer price is 9.6% discount to current value  New EPS will be 2.26% higher  Cooper gains a large distribution system  Cooper will benefit from cross- selling current products line from both company's in new markets